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Bulls Cling to One Last Hope, THESE Investors May Save the Stock Rally!

May 08, 2019

Better Data for Better Investment DecisionsBetter Data for Better Investment Decisions
Better Data for Better Investment DecisionsBetter Data for Better Investment Decisions

 

  • The US stock rally of 2019 that so many equity bulls hope will return may be salvaged by what held it back in the first place; institutional investors who remained underexposed to stocks despite a raging bull market. In fact, during the stock rally of 2019, more money flowed away from global equities in favor of safer assets. But because so many of the Street’s elite did not buy into the 2019 equity rebound, a floor may exist to halt the downturn, according to a Bloomberg report.
     
  • This follows an unexpected downdraft in US stocks following turmoil in trade negotiations between the US and China. From it’s open on Monday, the S&P fell 2.09% over the next 2 trading days.
     
  • As of data ending May 1st, global equities observed $95 billion in outflows in 2019 compared to well over $100 billion of inflows for global bonds in the same period. According to Barclay’s Plc Strategist Emmanuel Cau, “Equities rebounded year-to-date but without inflows, as investors stayed on the sidelines, both long-only's and hedge funds remain under-exposed.”  
     
  • Bloomberg explains that the US equity landscape is a divided market: on one side, you have bulls who are praising dovish signals by global central banks and expecting a resolution to the US-China trade war; on the other side, you have bears who attribute worsening economic data and stagnating earnings growth to their philosophy.  
     
  • But as we previously discussed, the very magnitude of underexposure to equities within large institutions, as demonstrated by the $95 billion of outflows from global equities in 2019, may prevent the downdraft in equities from extending. Simply put, institutional investors to not have much to sell! 
     
  • As evidence, Bloomberg looks to commodity trading advisors, or CTAs, which can sometimes serve as a leading indicator to overdone equity rallies.

1-Year Chart of S&P 500 Index and Commodity Trading Advisers (CTA) Index vs. 21-Day Beta of Indices

  • .CTAs are quantitatively-managed funds that user computer-driven buying to manage its portfolio. As we explained in our post last month, “$140 Billion Influx from Quants is Warnings Sign for this Equity Chief,” elevated inflows from CTAs, as well as retail investors, can sometimes signal that a rally is overdone.  
     
  • The beta of the CTA Index, which tracks the performance of 20 of the largest public CTA funds, against the S&P 500 Index can be used to measure the exposure to US equities within CTA. We chart this above.
     
  • Although beta levels of the CTA Index and the S&P 500 Index never returned to levels that proceeded the equity downturn in late-2019, beta was still elevated. While this works to support a short-term downturn in equities, its effect is less so than if equity exposure within CTAs was higher.

 

 

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Global Top Stock IdeasTOP LONG & TOP SHORT STOCK IDEAS FOR GLOBAL MARKETSMONTHLY TOP IDEAS FROM OUR MULTI-FACTOR QUANTITATIVE MODELS